If you have designs on retiring early, you’ve got some decisions to make.
Should you claim Social Security early to pay for living expenses and hold off on withdrawing money from other retirement accounts? Or should you wait to claim Social Security until your full retirement age or even longer, say, 70, when you’ll receive the largest possible benefit? In that case, you’d withdraw money from other retirement accounts to cover living expenses.
But what if you decide to delay claiming Social Security, take money from other accounts, and then, say, the value of your retirement investments drops, and the cost of everything soars?
Sound familiar? It should. Because those plunges and surges are exactly what’s happening with markets and inflation.
So with those worrying trends unfolding, will your nest egg run dry?
These are the questions J.P. Morgan Asset Management aimed to answer in a recent study. And here’s what it discovered:
Plan for longer life expectancy
Average life expectancy, even with the recent decline, has increased dramatically since 1990 but should be viewed as a mid-point, not an end-point, according to Sharon Carson, the executive director of retirement insights strategy at J.P. Morgan Asset Management.
Given that, you may need to plan on the probability of living much longer – perhaps 35 years in retirement – especially if you’re a non-smoker in excellent health, said Carson. How long might you live? Check out the Actuaries Longevity Illustrator.
Look at your investment performance
The lower your expected long-term investment return (your profits on it), which is typical as investors get older, and the longer your life expectancy, the more it pays to wait to take your Social Security benefits if you can, Carson said.
So, for instance, a woman who expects a long-term investment return of 5.5% and has a life expectancy of 88 should consider claiming at age 70.
Of course, not everybody can wait to take Social Security. “Some people really need the money,” Carson said. “And there’s nothing wrong with that.”
On average, however, unless you expect to earn high investment returns you’re probably better off waiting to claim Social Security until at least full retirement age, or even age 70, particularly if you have decent health and want that insurance for the long run, said Carson.
Consider inflation
Withdrawing assets in weaker markets early in retirement – what experts refer to as sequence-of-return risk – can ravage a portfolio, according to Carson.
Consider: If you retired at age 65 in 1966 with $1 million in a portfolio of 40% stocks and 60% bonds, then withdrew 5.2% of the initial portfolio value and then increased your withdrawal amount by 3%, the average rate of inflation from 1966 through 2000, your portfolio would be worth zero by age 90.
When could your Social Security run out?
In its research, J.P. Morgan Asset Management examined year-end portfolio values, with individuals claiming Social Security at various ages, using historical returns and inflation starting from 1966. In their study, they used the following assumptions: a starting portfolio value of $1.5 million; an initial spending rate of $80,000; a 40% stocks and 60% bonds portfolio; and historical Social Security cost-of-living increases. Here’s what they found:
A person who claimed Social Security at age 62 would have run out of money at age 90. A person who claimed Social Security at full retirement age would have run out of money at age 97 and a person who claimed Social Security at age 70 would have run out of money at age 100.
The research also concluded that a person with average life expectancy, 81, should wait until at least full retirement age to claim Social Security while someone with a long life expectancy, of 88-plus, should wait until age 70.
“If the markets are not so good, if you can at least hold on until your full retirement age (to claim Social Security), that’s probably going to still put you in a much better position,” Carson said.
Carson also ran simulations to show which claiming strategy would result in the highest portfolio values if bad market returns were persistent. Here’s what they found: A person who claimed at age 62 would run out of money at age 85; a person who claimed at full retirement age would run out of money at age 89 and a person who claimed at age 70 would run out of money at age 92.
And Carson ran simulations to show which claiming strategy would result in the highest portfolio values if bad market returns were persistent and there was high inflation. The result? It didn’t make much of a difference when a person claimed Social Security. All portfolios ran out of money around age 84. And given that, individuals would be advised to reduce their spending to increase how long their money would last, Carson said.
The bottom line advice
“We don’t say, ‘Take (Social Security) early.’ We don’t say, ‘Take it late.’” Carson stressed. “We say, ‘Make an informed decision so that you understand the ramifications of what your choices are.”
